Improving Your FICO Score

After your debts are discharged in bankruptcy, you will want to begin the process of reestablishing a good credit history. As a Minneapolis bankruptcy lawyer, one thing I advise you to do is learn how your FICO score is computed and what you can do to raise it.

What is a FICO Score?

“My FICO scored is a 580. My friend has a 775 score.” FICO scores, or credit scores, are something we use when discussing our credit worthiness. But, where do those numbers really come from? Understanding how a FICO score (the name comes from the company that developed it) is compiled can better help you achieve a higher score.

In simple terms, a FICO score is a calculated score that ranges from 300 to 850 based on several factors from your financial patterns and history. The actual calculation of the score is a little more complex. It is determined by a percentage formula based on five criteria:

Payment History (35%): Lenders look for a long history of on-time payments and no missed payments on all credit accounts.

Amount Owed (30%): This compares the amount you owe in relation to the total amount of available credit, sometimes referred to the revolving credit. The closer someone is to maxing out all their credit limits, the higher the risk of late payments, which can lower their credit score.

Length of Credit History (15%): Credit reports list how long accounts have been open. The score is comprised of the age of your oldest account and the average age of all accounts.

New Credit (10%): A high percentage of new credit can lower this portion of the score. Also tied into this is the number of credit report inquiries in a certain period of time (e.g. one year). This does not include any credit inquires made by you personally, an employer, or a potential lender sending a “pre-approved” credit offer.

Types of Credit in Use (10%): The mix of credit you have is also considered. This may include credit cards, retail cards, mortgages and installment loans.

Why Should I Care about my FICO Score?

Your ability to get credit, qualify for a mortgage, or rent an apartment can be directly affected by your FICO score. Your FICO score determines the interest rate you will be offered and can even affect the cost of your car insurance. Some employers will consider credit history. A poor score costs you more in payments, deposits, and even life opportunities. Therefore, even if you don’t want to regularly use credit, or are leery of credit after your bankruptcy, you should do enough to ensure a decent FICO score.

Different scales show different ranges for what is considered good or excellent credit, but on average the following ranges, according to Experian, mean:

There are steps you can take to improve you FICO score. However, significant changes in your score will take place over a period of months or even a year or longer. You cannot undo negative dings on your credit, but you can create new habits and behaviors that will make the score move in the desired direction. Here are some simple ways to improve your credit score.

Keep your used credit ratio 30% or lower: This seems simple. Pay down your credit cards to less than 30% owed vs. available credit each month. Then, keep the balances low. Unknown to many though is that even if you pay your balances in full every month, you could still have a higher ratio than you’d expect. Some creditor issuers use the actual balance on your statement as the one reported to the credit bureau each month. So, even if you’re paying the balance in full each month, your credit score still reflects your monthly usage balance of each credit line. However, if your creditor allows you to make multiple payments through the month you can eliminate or lower this variable and keep your score higher.

Eliminate small balances on multiple cards: If you use three lines of credits over a period of a month vs. one credit card for the same three purchases it can also lower your score. The score is calculated as owing on three cards instead of one card. Your score can be improved by paying off all the small balances. Then only use one or two cards for everything. If you do charge something on another card, pay it off in full before the end of the billing cycle.

Always pay your bills on time: This seems obvious, but lives get busy and payments get missed. Your on-time payments make up 35% of your total FICO score. Set up a payment strategy that works for you (auto pay, calendar reminders, email reminders).

Keep unused credit lines open: It may seem like a good idea to close any credit cards that you have paid off. Ironically, this can have a negative impact on your credit score. If the card remains open, but is paid off, it is a positive contributor to your credit score. Closing the card will lower your overall available credit, thus increasing your overall credit utilization percentage.

If you are struggling to repay debt and falling further and further behind, call (952) 921-5802 to speak with Minneapolis bankruptcy lawyer Gregory J. Wald.

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